Energizing non-energy investment to boost Canada's manufacturing sector: CIBC

Low loonie to stimulate Achilles heel of Canadian investment, machinery and equipment spending

TORONTO, April 12, 2016 /CNW/ - With an increase in investment not seen since 2006, Canada's beleaguered manufacturing sector is poised for a recovery, energized by a lower loonie, says a new report from CIBC Capital Markets.

"It appears a rotational shift in capital spending is finally underway, which will make the economy far less vulnerable to the cyclical ups and downs of the oil patch," says Benjamin Tal, Deputy Chief Economist at CIBC Capital Markets and co-author of the Energizing Non-Energy Investment report with Senior Economist Nick Exarhos. "2017 should see more strength as profits recover and a cheap Canadian dollar lifts external demand."

To the extent that in the last cycle energy and residential investment worked to crowd out spending in other industries, the coming years should see increased appetite for spending on machinery and equipment in the non-energy space, the report says.

"And, it might be happening already," says Mr. Tal.

No less than 18 of the 22 industries in Canada's manufacturing sector reported positive growth in spending intentions, and no less than nine industries reported intentions to increase spending by more than 20 per cent, the report says.

Although capital spending in a small number of relatively larger industries, such as food and auto parts, has been negative, recent export numbers suggest that these may be turning a corner, auguring for a need to invest in capacity ahead, with the Bank of Canada's first-quarter Business Outlook Survey giving further hope for a turn higher.

Mr. Tal forecasts non-resource spending to rise by 2.5 per cent this year and nearly 5 per cent in 2017. Last year, it was a negative 1.9 per cent.

"The Achilles heel of Canadian investment is in the area of machinery and equipment, where growth has disappointed not only in absolute terms but also relative to performance south of the border," he says.

At the current negative 2 per cent, the gap between Canada and the U.S. machinery and equipment investment as a share of GDP is the widest it's been in nearly 30 years. That reflects the effect of a previously over-valued Canadian dollar on plant location decisions and the very strong  post-recession recovery in U.S. machinery and equipment spending. "In fact, at no point over the past few decades did M&E investment intensity in Canada exceed that of the U.S. – even at the darkest days of the great recession," the report says.

In the oil patch, capital spending "fell by a thumping one-third" in 2015 -- the largest decline since the great recession.

When oil prices recover, a quick turnaround in energy-related investment isn't likely as the correlation between price and spending is probably much lower than it was in the pre-shale era, Mr. Tal adds. He expects energy-related investment to decline by another 20 per cent this year and advance only modestly in 2017.

"The absence of an old fashion swing producer in the market is likely to result in increased volatility in the price of crude, which in turn, would make CEOs more cautious with new investment," he says.

About CIBC

CIBC is a leading Canadian-based financial institution with 11 million individual, small business, commercial, corporate and institutional clients and three major business units – Retail and Business Banking, Wealth Management and Capital Markets. CIBC Capital Markets provides integrated global markets products and services, corporate and investment banking, and top-ranked research to corporate, government and institutional clients around the world. Visit www.cibccm.com for more information on CIBC and CIBC Capital Markets. News releases are available at www.cibc.com/ca/media-centre/.

SOURCE Canadian Imperial Bank of Commerce

PDF available at: http://stream1.newswire.ca/media/2016/04/12/20160412_C8018_PDF_EN_662954.pdf

Benjamin Tal, Deputy Chief Economist, CIBC Capital Markets at [phone], [email protected], or Caroline Van Hasselt, Director, External Communications and Media Relations, at [phone], [email protected]